Scottish landfill tax: use of waste for site engineering

Although the decision (80-page / 1.3MB PDF) relates to SLfT, some aspects could also have implications for landfill tax in England and other parts of the UK.

• Use of waste for engineering of outer cell walls and for restoration at landfill sites subject to Scottish landfill tax
• Implications for landfill tax in other parts of UK
• Scottish government consulting on changes to make use of material at landfill site taxable subject to limited exceptions

Background

Barr Environmental Limited, which operated two landfill sites in Scotland, claimed that almost 70% of the waste received at these sites was exempt from SLfT as it was used for engineering outer cell walls, construction of permanent roads or restoration after the cells had been used. Revenue Scotland argued that the waste was not exempt and assessed Barr to almost £100 million of SLfT including penalties.

Barr operated material recovery facilities at its sites. These sorted and processed the waste received, shredding non-recyclable waste to different particle sizes so that it was suitable for ‘site engineering’. This included mixing the processed material with clay to be used for outer cell walls.

Until 2015, landfill tax applied UK-wide. It was devolved to Scotland from 1 April 2015 and to Wales in 2018. 

The SLfT legislation is similar to the landfill tax legislation and so English case law is relevant.

SLfT is charged on a “taxable disposal”. One condition for a disposal to be a taxable disposal is that it is “a disposal of material as waste”.  A disposal of material is a disposal of it as waste “if the person making the disposal does so with the intention of discarding the material”.

Landfill tax in England and Northern Ireland  was charged on the same basis until 2018. However, the law was changed from 1 April 2018. Landfill tax is still chargeable when a ‘taxable disposal; is made but all but all placements of material into a landfill cell are deemed a taxable disposal, subject to limited exceptions. Material placed on or under a landfill site, but outside a landfill cell, is also deemed to be a taxable disposal if it is used for specified temporary purposes, including the construction of temporary roads.

HM Revenue & Customs (HMRC) had been enquiring into Barr’s landfill tax liabilities prior to SLft coming into force and there is another appeal relating to landfill tax which is stayed behind the Scottish case.

In July 2021 the Court of Appeal in London decided in a case involving Devon Waste Management Limited that waste material used in landfill sites as ‘fluff’ or black bag waste that had been shredded to protect the bottom, sides or top of landfill cells was a “disposal of material as waste” subject to landfill tax. The case related to the period before 2018 when the landfill tax legislation was substantially the same as SLfT. In the Court of Appeal’s view, the fact that the material used was black bag waste and was going into the landfill cell in any case meant that it was subject to landfill tax. It was not being placed in the cell only to serve a function, such as the membrane lining the landfill tax cell. It was just being discarded in a particular way in order to serve a double purpose.

In the Barr case, the tribunal decided that material used for the outer cell walls was taxable as it was disposed of as waste since the material was going to landfill anyway and so there was an intention to discard it.

The tribunal said that the fact that the major investment in the material recovery facilities was made without a documented decision based on a business case, when combined with “numerous” inconsistencies in the evidence, led to the adverse inference that the intention was always to discard the material as waste. In addition, the fact that the benefits Barr claimed of its method of construction of outer cell walls were never modelled or tested, and there were no formal written designs, specifications, risk assessments or quality control procedures in place, supported the view that Barr did not intend to make use of the alleged properties of the waste but rather intended to discard it.

The tribunal in the Barr case decided that there was an intention to discard the material used for restoration. Restoration is the process of covering a landfill cell once it has reached its maximum capacity and transforming it into usable land. The tribunal’s decision in relation to restoration seems to have been based on the nature of the material being used and specifically that it included food waste.

The conclusion that waste material used for restoration is taxable is potentially concerning – particularly in Scotland, where the test is still whether the material has been discarded. However, there were inconsistencies in the evidence in this case and problems with the record-keeping at the sites and the discovery of environmentally inappropriate waste being used for restoration. A site operator who could demonstrate that they were using inert material might be in a better position.

Roads

The use of material to construct temporary roads on a landfill site is specifically subject to SLfT. The tribunal disagreed with Revenue Scotland’s guidance that one of the distinguishing features between temporary and permanent roads is that permanent roads have engineered features such as kerbs or drains. The tribunal said that it was necessary to look at the purpose of the road rather than its construction. It did, however, note that where a road changes over time, at the point the surface is temporary it is taxed. Once the permanent layer has been laid then that layer would not be considered taxable. The same principle applied to the heightening of a temporary road until it became permanent. For landfill site operators it will be important to ensure that roads are appropriately categorised and evidence retained to prove this.

There is no specific exemption from SLfT or landfill tax for permanent roads. It is interesting that the tribunal did not conclude that the permanent roads would be taxable because the material would otherwise have gone to landfill and therefore there was a continued intention to discard of it, based on the Devon Court of Appeal decision. This is presumably because the tribunal considered there was no intention to discard that material because the intention was to use it to build roads. This is a fine line, and where the landfill site operator takes material as waste and would have to discard it into its landfill site if it was not used in the roads the conclusion is debatable. Case law has not yet provided any reliable certainty for taxpayers in this position.

Proposed legislative changes

The Scottish government is consulting on changes to SLfT. It is proposing to make it clearer that the exemption for the use of material in landfill cells is limited. The proposed legislation will provide that any use of material in a landfill cell is taxable unless specifically excluded. The proposed exclusions are limited to the use of material to form a layer immediately above the base of the landfill cell and which performs the function of drainage and the insertion of pipes, pumps or associated infrastructure into a landfill cell for the purposes of the extraction or control of surplus liquid or gas from or within that cell.

The proposed legislation is described as providing “additional clarity” as to when a taxable disposal is considered to have occurred and it is stated that it is not intended to alter or expand the scope of the tax, but to confirm what is taxable.

The proposed changes to SLfT follow changes to landfill tax in England and Northern Ireland in 2018, which made it clear that material used to line cells is expressly subject to landfill tax.

Co-written by Sam Wardleworth of Pinsent Masons.